May 11, 2010

Arkansas Sen. Blanche Lincoln has managed to get a proposal into the financial-overhaul bill that effectively could force banks to spin off their derivatives-trading business. Since the provision doesn’t appear to have broad Democrat support, it may yet die. But it has gotten this far and, at the very least, it shows that lawmakers are open to provisions that could have a radical impact on large banks’ derivatives portfolios.

Taxpayers need to ask: Would the Blanche amendment actually protect them? And the question for bank stock investors: What would it do to the earnings and capital positions of banks with large derivatives books, like J.P. Morgan Chase?

On the first, it is important to understand how the amendment works. It effectively says banks that retain their derivatives business would no longer qualify for two critical sources of government support: federal deposit insurance and assistance from the Federal Reserve. That threat would persuade practically all banks to spin off swaps-trading businesses.

The taxpayer might get most protection in a full divestment that leaves the bank with no control over the swaps business. A truly independent entity would have to raise a lot of capital to persuade counterparties of its credit-worthiness, making it less likely to require a bailout.

However, the amendment just may prompt banks to turn swaps businesses into owned affiliates. Under that scenario, they likely would retain strong ties to the parent. During the recent credit crunch, for example, large banks receiving government aid decided to support entities that investors thought were separate. Think Citigroup and its structured-investment vehicles.
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As for the financial impact on the banks, they haven’t given any real guidance, even when asked to supply some during recent first-quarter conference calls. J.P. Morgan Chief Executive James Dimon did say that derivatives legislation could put a dent in annual revenue by “several hundred million to a couple of billion dollars.” And Mr. Dimon’s estimate didn’t take into account the potential impact of the Blanche amendment.

One big cost would be capitalizing any new derivatives entities. The Securities Industry and Financial Markets Association, a bank industry group opposed to the spinoff provision, said establishing “nonbank affiliates” could require $250 billion of capital. That seems high, given that it is equivalent to just under half the combined Tier 1 capital for the top five derivatives-trading banks.

Whatever the true number, one of the reasons to support tougher financial legislation is that over-the-counter derivatives can allow banks to hold insufficient capital for the bets they are making. Other provisions in overhaul legislation are designed to stop that. But in terms of simplicity, a key ingredient for regulatory effectiveness, they pale in comparison to the Blanche bill.

WASHINGTON—Democrats took a step toward their goal of overhauling financial regulation, reaching a tentative deal to set restrictions on trading in exotic financial instruments known as derivatives.

Among the considerations still in the balance: A big provision being sought by Warren Buffett in recent weeks. A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett’s Berkshire Hathaway Inc., potentially helping the famed investor avoid a financial hit, congressional aides say.

A key Senate committee had changed its proposed overhaul of derivatives regulation after lobbying by Mr. Buffett’s Berkshire Hathaway. John Bussey and David Weidner discuss.

Sunday night’s deal, hammered out by Senate Banking Chairman Chris Dodd (D., Conn.) and Senate Agriculture Chairwoman Blanche Lincoln (D., Ark.) reflects the populist, anti-bank sentiments simmering on Capitol Hill. A Senate Democratic official said the two have “worked out a deal,” which is expected to be folded into a broader Democratic measure that revamps the U.S. system of financial regulation in the wake of the catastrophic financial collapse that occurred in 2008. The agreement includes a proposal that could force banks to spin off their lucrative derivative trading operations, reshaping Wall Street.

The fate of Berkshire’s effort to influence the legislation remains uncertain. Senate officials said Sunday night that most of the details of the agreement haven’t yet been finalized.

The provision, sought by Berkshire and pushed by Nebraska Sen. Ben Nelson in the Senate Agriculture Committee, would largely exempt existing derivatives contracts from the proposed rules. Previously, the legislation could have allowed regulators to require that companies such as Nebraska-based Berkshire put aside large sums to cover potential losses. The change thus would aid Berkshire, which has a $63 billion derivatives portfolio, according to Barclays Capital.

Mr. Buffett’s push is especially notable because he has warned of the potential dangers of derivatives, famously branding them “financial weapons of mass destruction.”

The White House has been trying to kill the Berkshire provision on the grounds that it would weaken the government’s ability to regulate the enormous market for derivatives. Berkshire Hathaway argued that it shouldn’t be made to redo existing contracts and that it is already healthy enough to cover its obligations. The battle over the provision shows how lobbying by businesses and lawmakers to insert just a few words into a complex bill can have a major impact on the country’s biggest companies.

President Barack Obama is close to securing his revamp of financial-market rules, a package aimed at preventing a repeat of the financial crisis. Tightening the regulation of derivatives—complex financial instruments used across finance and business—is a central element. The Senate could begin debate on Democrats’ broader package of changes to financial regulation Monday.
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* Deal May Affect Banks’ Trading Desks

The change Mr. Buffett has sought would apply only to existing contracts, assuming the bill becomes law. It would apply broadly, not just to Berkshire. Many newly written derivatives contracts, including Berkshire’s, would have to post collateral.

Mr. Buffett has been a vocal critic of how some in the financial markets use derivatives. In making his case for regulation, Mr. Obama in a New York speech last week quoted Mr. Buffett’s “financial weapons of mass destruction” remark, which was made in Berkshire’s 2002 annual report. In his letter to investors this year, Mr. Buffett, an Obama supporter, wrote that while Berkshire has “long invested in derivatives,” the contracts “can be dynamite.”

A fracas over the measure could hurt Democrats. The Obama administration wants to avoid the home-state horse-trading that almost sank its health-care overhaul. Berkshire is based in Omaha, Neb., and has longstanding ties to the state’s Sen. Nelson.

Derivatives are bets between two parties on the future price of a good, such as oil or mortgages. They are typically used by companies to manage risks; airlines use derivatives to lock in future fuel prices. In addition, investors trade them for profit.

In the financial crisis, American International Group Inc. was nearly felled by trading in derivatives related to mortgage securities. The company wasn’t required to hold significant cash in reserve for the deals and couldn’t meet its obligations when the housing market tanked, threatening to kill its trading partners and prompting a federal bailout.

The legislation under consideration would require certain companies to put up a chunk of cash, known as collateral, when they enter such contracts to cover possible losses. The legislation could require that derivatives trade more like stocks or bonds—on exchanges, instead of in private deals.

Berkshire has argued Congress doesn’t have authority to make it redo existing contracts, especially since the company is sitting on about $20 billion in cash. Mr. Buffett has said he rarely has to post collateral, which is why for Berkshire the new rules could hurt.

Berkshire representatives declined to comment. But the company’s position, said a person close to Berkshire, is that the new language will aid the majority of companies that legitimately use derivatives to insure against risks. Under the original wording, hundreds of major U.S. businesses, not just Berkshire, might have been hurt by the requirement that collateral be posted for existing contracts, said the person close to Berkshire. If the language isn’t amended, the big beneficiaries would be Wall Street firms that create the derivatives. That’s because if the businesses have to post collateral, the Wall Street firms can dispense with buying their own insurance against a default on the instruments.

Lawmakers began considering the Berkshire proposal after Sen. Nelson relayed concerns raised by David Sokol, chairman of Berkshire Hathaway subsidiary MidAmerican Energy Holdings Co., people familiar with the matter said. Mr. Sokol is a close lieutenant of Mr. Buffett and is considered the investor’s likely successor.

A representative for Mr. Sokol didn’t respond to telephone calls and written messages seeking comment.

Mr. Buffett has accumulated huge positions in derivatives through Berkshire. MidAmerican, one of the nation’s largest utility operators, uses derivatives to hedge against changes in the price of energy.

Capitol Hill aides from both parties said Berkshire’s lobbying campaign has been forceful. Mr. Sokol often invoked his boss’s name, saying how important the issue was to Mr. Buffett, aides say.

Mr. Sokol told lawmakers the Senate bill would force Berkshire to post collateral against good-faith contracts into which it had already entered, for a total congressional aides put in the billions of dollars. Renegotiating those contracts would be a logistical headache, people familiar with his arguments said.

In March, Nebraska’s other senator, Mr. Johanns, pushed a similar amendment in the Senate Banking Committee. It wasn’t formally offered after Republican lawmakers decided to pull all their amendments. “There is bipartisan agreement that changing the requirements of existing contracts midstream is wrong and unreasonable,” Mr. Johanns said in a statement.

The Senate Agriculture Committee shares jurisdiction over derivatives because it oversees the Commodity Futures Trading Commission. Berkshire officials approached Mr. Nelson, a member of that committee, to press their concerns.

Berkshire officials have long supported Mr. Nelson. Berkshire employees, including Mr. Buffett, have given Sen. Nelson $75,550 over his political career, more than any other company, according to the Center for Responsive Politics, a nonpartisan group that tracks such data.

The derivatives bill passed the Senate Agriculture Committee on a 13-8 vote last week with Mr. Nelson in favor. Mr. Johanns opposed, citing the potential impact on farmers.

Jake Thompson, a spokesman for Mr. Nelson, said arguments made by Berkshire officials are consistent with the senator’s philosophy: New rules shouldn’t apply retroactively.

Mr. Thompson said political contributions had no bearing on the matter. “There might be a perception of a big company having some effect, but I think it’s more the argument and the principle they were making that had the effect,” he said.

A spokeswoman for Sen. Lincoln, who chairs the Senate Agriculture Committee, said the change was a “technical correction to the legal certainty issue” after “a number of parties” raised concerns about the impact on such long-term contracts.

Berkshire often isn’t required to post collateral on derivatives because of its strong financial position. That means the company can use the upfront cash it gets from these deals for other investments. At the end of 2009, that capital totaled $6.3 billion.

Analysts say Berkshire may deserve an exemption. In the financial crisis, the company’s strength allowed it to invest in shaky firms such as Goldman Sachs, bolstering the financial system. The new regulations would punish Berkshire for the bad behavior of others, they say. “Claiming Berkshire poses a risk to the financial system is a difficult case to make,” says Morningstar analyst Bill Bergman.
—Susan Pulliam contributed to this article.

Write to Damian Paletta at damian.paletta@wsj.com and Scott Patterson at scott.patterson@wsj.com

May 2, 2010

Mr. Buffett also strongly defended the firm’s chief executive, Lloyd C. Blankfein, saying he did not think Mr. Blankfein needed to be replaced.

His support for Goldman came in a question-and-answer session at the annual meeting in Omaha of Berkshire Hathaway, the giant insurance and investment firm Mr. Buffett runs. Berkshire owns $5 billion of preferred stock in Goldman.

Still, what drew the most attention was Mr. Buffett’s full-throated support for Goldman. He drew upon some of the same points that Goldman has used in its own defense, including the sophistication of the investors the S.E.C. says were defrauded by Goldman’s lack of adequate disclosure in the deal. He said those investors should have conducted better due diligence. Of one investor, he said, “It’s hard for me to get terribly sympathetic when a bank makes a dumb credit bet.”

He also stood behind Mr. Blankfein. When asked whom he would select if Goldman needed to find a new leader, Mr. Buffett replied, “If Lloyd had a twin brother, I would vote for him.”

Mr. Buffett has a significant investment in Goldman. In 2008, during the depths of the financial crisis, Berkshire invested $5 billion in preferred shares. Those shares carry a 10 percent interest rate, meaning that Berkshire is earning about $500 million a year from its holdings. (Or as Mr. Buffett put it, $15 a second.)

Though Mr. Buffett said the S.E.C. lawsuit had not yet negatively influenced his opinion of Goldman, he said he would revise his thinking if new evidence came to light.

Mr. Buffett added that Goldman is a longtime adviser that “helped build Berkshire Hathaway” by selling them businesses for more than 50 years.

Mr. Buffett’s longtime lieutenant, Charles Munger, tempered his boss’s kind words. Mr. Munger, Berkshire’s vice chairman, said that there is a difference between behaving legally and behaving ethically — and that a business should not simply follow the former.

Mr. Buffett also weighed in on the financial regulation overhaul bill that is pending in the Senate, which include provisions that may force investors in derivatives contracts to add more collateral to their holdings. (Berkshire has lobbied against such provisions.) Mr. Buffett said that Berkshire was unlikely to be forced to “put up a dime” in additional money on its existing contracts, though he added that the firm would do so if required.

WASHINGTON—Goldman Sachs Group Inc. is lobbying hard to kill a provision in financial industry overhaul legislation requiring big banks to sell off their derivatives-trading businesses, and rival banks are welcoming the help, shrugging off attacks on the firm by lawmakers and securities regulators.

Goldman’s lobbying could put Democrats and the White House, which is lukewarm on the provision, in a difficult position. With congressional elections looming in November, lawmakers don’t want to appear supportive of Goldman or Wall Street.

But Goldman’s leadership is less concerned about politics than the provision itself, known as “section 106.” The nation’s five largest banks together earned $23 billion from derivatives trading in 2009, and are working separately and together to defeat the provision.

“I don’t think political Kabuki theatre is having any impact on the ability to get meetings and be heard” in Congress, says a person familiar with Goldman’s strategy. “The point of the matter from their standpoint is they can be heard…Nobody’s being treated like lepers.”

A non-Goldman banking executive agreed that working together to kill the provision was a “no-brainer.”

“I’m running across hordes of Goldman lobbyists working on this,” said a lobbyist working the bill on Capitol Hill.

Kirsten Gillibrand

Late Wednesday some lawmakers predicted section 106 wouldn’t be included in the final legislation, although the final outcome isn’t certain. The Senate is expected to begin debate on the bill to overhaul regulation of financial derivatives Thursday.

The White House has been lukewarm on the section-106 provision. A source familiar with the White House’s deliberations on the matter said that the president pulled back other administration officials who wanted to work to drop it.

Goldman is focusing its efforts on congressional delegations from New York and New Jersey, whose region could lose significant tax revenue should the derivatives provision pass.

Key to bankers’ effort to defeat the provision, three people involved say, is lobbying by the U.S. Chamber of Commerce, the Securities Industry and Financial Markets Association, the Business Roundtable, and Financial Services Forum.

Goldman and other big banks have gotten the ear of New York Democratic Sen. Kirsten Gillibrand, who says she has “concerns” about a central provision in the legislation.

“The senator reiterated her support for the bill, which she voted for, but also shared these concerns,” said Matt Canter, Mrs. Gillibrand’s spokesman.

“Our office has been hearing from many New York companies and consumer organizations about this legislation,” a spokesman for Ms. Gillibrand said Wednesday. “Senator Gillibrand does share the president’s concerns about whether this one provision could impact lending to small businesses.”

Ms. Gillibrand, also fighting for her seat in November, is attending a fund-raising event on Monday with many longtime Democratic backers who also work on Wall Street. An invitation to the event offers “a political discussion” with Sen. Chris Dodd (D., Conn.) and Ms. Gillibrand at a private Park Avenue residence Monday. Donors are encouraged to contribute and solicit up to $19,800 to achieve “host” status. The person familiar with Goldman’s strategy said the firm wouldn’t rule out sending a representative to the event.

Goldman Sachs has ramped up its presence its Washington lobbying operation in recent years and now ranks among the top corporate spenders on lobbyists. Last year, the company spent at least $2.8 million to influence Congress and the Obama administration.

That’s more than double the $1.2 million that Goldman spent on lobbying just four years ago, according to lobbying-expenditure records compiled by the nonpartisan Center for Responsive Politics.

Goldman’s Washington operations are run by Michael Paese, a former aide to House Financial Services Committee Chairman Barney Frank (D., Mass.). Mr. Paese oversees a team that includes 14 outside lobbying firms encompassing dozens of lobbyists. In the last few years, Goldman has beefed up its ranks of Democratic lobbyists, including former Rep. Richard Gephardt, a Missouri Democrat who once was one of the top Democrats in the U.S. House.

The firm also employs a number of senior Republican lobbyists, including Ken Duberstein, a former White House chief of staff under former President Ronald Reagan.

Goldman is also a big source of campaign donations for both Democrats and Republicans. Since 1989, Goldman’s political action committee and employees have been the No. 1 corporate source of campaign donations to the Democratic Party with a total of $20.3 million, according to the Center for Responsive Politics. President Obama alone received about $1 million from Goldman employees for his 2008 presidential campaign.

The company and employees are also the fourth-largest source of political donations to Republicans with $11 million.

The SEC’s lawsuit has damaged some of the relationships Goldman has nurtured, including with Ms. Lincoln, chief mover behind derivatives provision.

Ms. Lincoln, who is facing a stiff re-election campaign from a Democratic primary challenger, proposed the derivatives legislation on April 9, the same day that the SEC announced its lawsuits against Goldman.

Just a few weeks ago, Mrs. Lincoln was in discussions with Goldman officials about hosting a fund raising in New York with company employees. She has since said she would no longer ask for campaign donations from Goldman or its employees.

Last week, Mrs. Lincoln overcame industry opposition and won enough votes in the Agriculture Committee to approve the new derivatives rules. This week, she became the first Democratic senator to give back the donations she has received from Goldman’s PAC and employees. Mrs. Lincoln said she would donate the $7,500 she accepted from Goldman and give it to the Arkansas Hunger Relief Alliance. In a press release, Mrs. Lincoln called on other senators to follow her lead.

April 28, 2010

The finance bill has three main parts. First, it attempts to tackle the problem of financial institutions that are too big to fail. Second, it would set up a consumer-protection agency that would try to protect consumers from taking out loans they cannot afford or buying products with hidden costs. Third, it proposes to change the way derivatives are traded.

The White House, with a hyperactivity reminiscent of its push for health-care reform, has been encouraging speedy compromise and action. “Unless your business model depends on bilking people, there is little to fear from these new rules,” Barack Obama told bankers in a speech delivered in New York on April 22nd. Joe Biden, the vice-president, and Tim Geithner, the treasury secretary, now have the somewhat harder task of travelling around and explaining how changing regulations on synthetic derivatives will improve the lot of America’s middle class.

I followed the first few hours of the hearing, and I was surprised at the lack of understanding on the part of the Senators on the committee regarding the fundamentals of market making and risk management. I work in the financial industry and to me the initial defense made by the GS executives made perfect sense. Every single investment bank can be accused of this behaviour, not just GS, and it is a market maker’s job to provide liquidity to both sides of the market.

GS is essentially being persecuted for profiting from selling products they would have rather not owned themselves. By that logic, should we not be picking on anyone that endorses products they don’t use? What about advertising companies that have helped promote products that were eventually deemed unsafe… what about the celebrities that appeared in commercials promoting such products… Don’t we need some regulation there?

Obama’s so-called reform will do nothing to hold accountable the criminals at the head of the banks and hedge funds or break up the financial behemoths that exert a stranglehold on the economy. Instead, it will set up a mechanism to institutionalize government rescue operations of big financial firms to protect the interests of bank executives, shareholders and creditors, ultimately at public expense.

The lawless and reckless actions of Wall Street CEOs have had devastating consequences for tens of millions of people in the US and around the world. The wreckage left in the wake of the financial tsunami of 2008 is registered in millions of lost jobs, home foreclosures, utility shutoffs, and rising hunger, disease and poverty.

With the help of trillions of dollars in taxpayer bailouts, the bankers are making more money today than ever, even as schools are closed, libraries disappear and museums and opera houses are shuttered. There is, the people are told, “no money” for jobs or basic social services.

There is plenty of money. The problem is that it is concentrated in the hands of a financial aristocracy. The immense concentration of wealth among these individuals is not only morally repugnant, it is a menace to society. It is the result of the plundering of the social wealth to feed criminal appetites, at the direct cost of the productive forces.

During the rise of American capitalism as an industrial power, the vast fortunes of the corporate elite, while achieved through ruthless exploitation of the working class, were associated with the expansion of industry and the production of useful products. That is not the case with today’s financial elite. Its wealth is amassed on the basis of financial manipulation and outright fraud, linked to the destruction of the social infrastructure and industry.

Neither bill does anything to curb the power of the banks or limit their parasitic and socially destructive activities. What the media is calling the “most sweeping overhaul” of the banking system since the Great Depression in reality sanctions the ever greater monopolization of the financial system by a handful of Wall Street giants, imposes no limits on executive pay, and allows the banks and hedge funds to continue gambling on exotic and largely unregulated securities such as collateralized debt obligations and credit default swaps.

The so-called bank “reform” is an exercise in mass deception—an attempt to placate popular hostility to the banks and provide the government with political cover while it continues to do the bidding of Wall Street.

The bills have been drawn up in the closest consultation with bankers and bank lobbyists. This collusion has been widely reported in the press and presented as a perfectly normal and acceptable fact of political life. The front-page lead article in Monday’s Wall Street Journal describes the intensive lobbying being carried out by billionaire investor Warren Buffett to alter the Senate bill’s provisions on derivatives.

Buffett, an Obama supporter, wants to exempt existing derivatives deals from collateral requirements in the current language of the bill—a change that would save him billions on his $63 billion derivatives portfolio. Both senators from his home state of Nebraska, one Democrat and one Republican, are championing his cause.

This is just one example of the web of corruption and bribery that extends from Wall Street to the White House and Capitol Hill. The banks have thus far spent $455 million lobbying Congress on the overhaul and handed out $34 million in 2010 election campaign donations, most of it to Democrats.

The circle of corruption includes the ratings companies such as Moody’s and Standard & Poor’s, which blessed toxic subprime mortgage-backed securities with triple-A ratings in return for fees from the banks they were rating, and government regulators who move seamlessly from regulatory offices to lucrative posts at the banks they were supposedly overseeing.

The colossuses of Wall Street amass their huge profits by means of fraud and swindling. Over the past few weeks systematic accounting fraud at Lehman Brothers has been exposed and the Securities and Exchange Commission has indicted Goldman Sachs for defrauding its clients in the run-up to the subprime mortgage crash. This is only the tip of the iceberg.

April 26, 2010

“What we have seen is a substantial change in mentality among the overseas community in the past two years,” said Jackie Bugnion, director of American Citizens Abroad, an advocacy group based in Geneva. “Before, no one would dare mention to other Americans that they were even thinking of renouncing their U.S. nationality. Now, it is an openly discussed issue.”

Anecdotally, frustrations over tax and banking questions, not political considerations, appear to be the main drivers of the surge. Expat advocates say that as it becomes more difficult for Americans to live and work abroad, it will become harder for American companies to compete.

American expats have long complained that the United States is the only industrialized country to tax citizens on income earned abroad, even when they are taxed in their country of residence, though they are allowed to exclude their first $91,400 in foreign-earned income.

One Swiss-based business executive, who spoke on the condition of anonymity because of sensitive family issues, said she weighed the decision for 10 years. She had lived abroad for years but had pleasant memories of service in the U.S. Marine Corps.

Yet the notion of double taxation — and of future tax obligations for her children, who will receive few U.S. services — finally pushed her to renounce, she said.

“I loved my time in the Marines, and the U.S. is still a great country,” she said. “But having lived here 20 years and having to pay and file while seeing other countries’ nationals not having to do that, I just think it’s grossly unfair.”

“It’s taxation without representation,” she added.

Stringent new banking regulations — aimed both at curbing tax evasion and, under the Patriot Act, preventing money from flowing to terrorist groups — have inadvertently made it harder for some expats to keep bank accounts in the United States and in some cases abroad.

Some U.S.-based banks have closed expats’ accounts because of difficulty in certifying that the holders still maintain U.S. addresses, as required by a Patriot Act provision.

“It seems the new anti-terrorist rules are having unintended effects,” Daniel Flynn, who lives in Belgium, wrote in a letter quoted by the Americans Abroad Caucus in the U.S. Congress in correspondence with the Treasury Department.

“I was born in San Francisco in 1939, served my country as an army officer from 1961 to 1963, have been paying U.S. income taxes for 57 years, since 1952, have continually maintained federal voting residence, and hold a valid American passport.”

Mr. Flynn had held an account with a U.S. bank for 44 years. Still, he wrote, “they said that the new anti-terrorism rules required them to close our account because of our address outside the U.S.”

Kathleen Rittenhouse, who lives in Canada, wrote that until she encountered a similar problem, “I did not know that the Patriot Act placed me in the same category as terrorists, arms dealers and money launderers.”

Andy Sundberg, another director of American Citizens Abroad, said, “These banks are closing our accounts as acts of prudent self-defense.” But the result, he said, is that expats have become “toxic citizens.”

The Americans Abroad Caucus, headed by Representative Carolyn B. Maloney, Democrat of New York, and Representative Joe Wilson, Republican of South Carolina, has made repeated entreaties to the Treasury Department.

In response, Treasury Secretary Timothy F. Geithner wrote Ms. Maloney on Feb. 24 that “nothing in U.S. financial law and regulation should make it impossible for Americans living abroad to access financial services here in the United States.”

But banks, Treasury officials note, are free to ignore that advice.

“That Americans living overseas are being denied banking services in U.S. banks, and increasingly in foreign banks, is unacceptable,” Ms. Maloney said in a letter Friday to leaders of the House Financial Services Committee, requesting a hearing on the question.

Mr. Wilson, joining her request, said that pleas from expats for relief “continue to come in at a startling rate.”

Relinquishing citizenship is relatively simple. The person must appear before a U.S. consular or diplomatic official in a foreign country and sign a renunciation oath. This does not allow a person to escape old tax bills or military obligations.

Now, expats’ representatives fear renunciations will become more common.

“It is a sad outcome,” Ms. Bugnion said, “but I personally feel that we are now seeing only the tip of the iceberg.”

They may also want to win some more concessions. Mr. Shelby said one flaw in the existing language was that the bill allowed “too much flexibility” for regulators like the Federal Reserve and the Federal Deposit Insurance Corporation in deciding when to step in if a bank makes overly risky investments.

Still, his conciliatory tone, while sitting alongside Senator Christopher J. Dodd of Connecticut, the committee’s ranking Democrat and sponsor of the bill, contrasted sharply with the combative posture taken in recent weeks by the party’s Senate leader, Mitch McConnell of Kentucky, who has repeatedly warned that the bill would set the stage for “endless taxpayer-financed bailouts.”

…

Even Senator McConnell sounded like less of a doomsayer about the bill. Appearing on “Fox News Sunday,” he said, “We don’t have a bipartisan compromise yet, but I think there’s a good chance we’re going to get it.” Still, he added, “What I’d like to see is an opportunity to prevent the Democrats from doing to the financial services industry what they just did to the health care of this country.”

To win his support, he said, the bill needs to eliminate what he called the $50 billion bailout fund and create a system where creditors can expected to be treated fairly — unlike what happened in the bailout of General Motors where, he contended, the government treated the unions better than the bondholders. He also said the bill needs to augment requirements for how much capital banks have on hand to make it virtually impossible for banks to be too big too fail.

April 23, 2010

On Thursday, President Obama went to Manhattan, where he urged an audience drawn largely from Wall Street to back financial reform. “I believe,” he declared, “that these reforms are, in the end, not only in the best interest of our country, but in the best interest of the financial sector.”

Well, I wish he hadn’t said that — and not just because he really needs, as a political matter, to take a populist stance, to put some public distance between himself and the bankers. The fact is that Mr. Obama should be trying to do what’s right for the country — full stop. If doing so hurts the bankers, that’s O.K.

More than that, reform actually should hurt the bankers. A growing body of analysis suggests that an oversized financial industry is hurting the broader economy. Shrinking that oversized industry won’t make Wall Street happy, but what’s bad for Wall Street would be good for America.

Now, the reforms currently on the table — which I support — might end up being good for the financial industry as well as for the rest of us. But that’s because they only deal with part of the problem: they would make finance safer, but they might not make it smaller.

What’s the matter with finance? Start with the fact that the modern financial industry generates huge profits and paychecks, yet delivers few tangible benefits.

Remember the 1987 movie “Wall Street,” in which Gordon Gekko declared: Greed is good? By today’s standards, Gekko was a piker. In the years leading up to the 2008 crisis, the financial industry accounted for a third of total domestic profits — about twice its share two decades earlier.

These profits were justified, we were told, because the industry was doing great things for the economy. It was channeling capital to productive uses; it was spreading risk; it was enhancing financial stability. None of those were true. Capital was channeled not to job-creating innovators, but into an unsustainable housing bubble; risk was concentrated, not spread; and when the housing bubble burst, the supposedly stable financial system imploded, with the worst global slump since the Great Depression as collateral damage.

So why were bankers raking it in? My take, reflecting the efforts of financial economists to make sense of the catastrophe, is that it was mainly about gambling with other people’s money. The financial industry took big, risky bets with borrowed funds — bets that paid high returns until they went bad — but was able to borrow cheaply because investors didn’t understand how fragile the industry was.

And what about the much-touted benefits of financial innovation? I’m with the economists Andrei Shleifer and Robert Vishny, who argue in a recent paper that a lot of that innovation was about creating the illusion of safety, providing investors with “false substitutes” for old-fashioned assets like bank deposits. Eventually the illusion failed — and the result was a disastrous financial crisis.

And here’s the thing: after taking a big hit in the immediate aftermath of the crisis, financial-industry profits are soaring again. It seems all too likely that the industry will soon go back to playing the same games that got us into this mess in the first place.

So what should be done? As I said, I support the reform proposals of the Obama administration and its Congressional allies. Among other things, it would be a shame to see the antireform campaign by Republican leaders — a campaign marked by breathtaking dishonesty and hypocrisy — succeed.

But these reforms should be only the first step. We also need to cut finance down to size.

And it’s not just critical outsiders saying this (not that there’s anything wrong with critical outsiders, who have been much more right than supposedly knowledgeable insiders; see Greenspan, Alan). An intriguing proposal is about to be unveiled from, of all places, the International Monetary Fund. In a leaked paper prepared for a meeting this weekend, the fund calls for a Financial Activity Tax — yes, FAT — levied on financial-industry profits and remuneration.

Such a tax, the fund argues, could “mitigate excessive risk-taking.” It could also “tend to reduce the size of the financial sector,” which the fund presents as a good thing.

But the fact is that we’ve been devoting far too large a share of our wealth, far too much of the nation’s talent, to the business of devising and peddling complex financial schemes — schemes that have a tendency to blow up the economy. Ending this state of affairs will hurt the financial industry. So?

April 22, 2010

The Senate Agriculture Committee has approved bipartisan legislation that would require derivatives to be traded on regulated exchanges and cleared through central clearinghouses, advancing the financial regulatory reform effort.

Blanche Lincoln

The Wall Street Transparency and Accountability Act is intended to bring increased transparency to U.S. financial markets and will be incorporated into the larger financial reform bill that will be considered by the full Senate in the coming weeks.

“The Senate Agriculture Committee has taken a significant step toward bringing real reform to our nation’s financial markets, providing the transparency and accountability that the American people deserve in a bipartisan way, “ said committee chair Blanche Lincoln, D-Ark., in a statement. “My bill will bring the $600 trillion derivatives market out of the dark and into the light of day, ending the days of backroom deals and putting this money on Main Street where it belongs.”

Lincoln’s bill would prohibit the Federal Reserve and the Federal Deposit Insurance Corp. from providing any federal funds to bail out Wall Street firms that engage in risky derivative deals. Banks engaging in risky swaps transactions would be forced to spin off their swap dealer desks or be barred from receiving any federal assistance.

The legislation also includes mandatory clearing and trading requirements and real-time reporting of derivatives trades. The bill’s narrow end-user exemption would allow commercial interests, such as electric cooperatives, to be able to hedge business risks, however.

Treasury Secretary Tim Geithner praised the bill. “Today, the Senate took another step towards comprehensive financial reform,” he said in a statement. “Under Chairman Lincoln’s strong leadership, the Senate Agriculture Committee voted out a bipartisan bill that will bring derivatives trading out of the dark, provide strong oversight of market participants, and combat fraud, abuse and manipulation. Chairman Dodd’s comprehensive and tough legislation has already passed out of the Senate Banking Committee. We will continue to work with Chairman Dodd, Chairman Lincoln, and Senate leadership to craft strong derivatives provisions that close loopholes, provide necessary transparency, and reduce threats to financial stability as part of a final, comprehensive financial reform bill.”

Republicans were not as enthusiastic about the bill, but appeared to be in more of a mood to work with Democrats on the final shape of the financial reform bill. Sen. Charles Grassley, R-Iowa, voted to pass the bill out of committee, but expressed reservations nonetheless.

“I’m disappointed that the legislation presented for committee action was not bipartisan,” he said. “The chairman and ranking member had worked for months for a bipartisan bill, but politics thrown into the mix by the White House derailed that effort in the end. I hope the floor debate on a larger financial reform package is different, and that good policy is put ahead of politics. Even so, I voted for the chairman’s derivatives bill today because I think transparency is the right policy. The draft isn’t perfect, and I want to fix the way a provision is written so that whistleblower protections are not weakened as a result, for example. But the Lincoln bill is an important step in the right direction for transparency and accountability in the derivatives market.”

Grassley cautioned, however, that his vote for reform of the derivatives market doesn’t mean he will vote to support the larger financial reform bill on the Senate floor. “The derivatives piece is significant, but that larger bill has a number of flaws that need to be resolved before I’d support it,” he said. “Again, I hope the majority leadership of the Senate allows the kind of debate, negotiation and amendment process needed to make those kinds of changes so that representative government can work as it should.”